Raiffeisen Bank International rides CEE rebound with AT1 debut

As one of the largest financial institutions in central and eastern Europe, Raiffeisen Bank International (RBI) was hit by the regional economy’s recent challenges. Two years of Russian recession and the plummeting rouble caused problems for the many Russian companies that funded in dollars, leading to a spike in non-performing loans and eroding RBI’s earnings in the country. The group also came under pressure in Ukraine, where the war in the east has led to a severe economic downturn.

But amid signs of an economic upturn, RBI has restructured and is positioned for a rebound. In January, its shareholders approved the bank’s merger with its majority owner Raiffeisen Zentralbank Österreich, in a plan aimed at strengthening its capital base, after it came third from last in regulatory stress tests of 51 major European lenders in 2016.

The restructuring was seen as a way to simplify the business and strengthen the bank’s capital position, and Raiffeissen set a target common equity Tier 1 (CET1) capital ratio of about 13% for the next two to three years. The transaction was completed in March, following which the combined group reported a CET1 ratio of 12.4%, which rose to 12.8% at the end of the second quarter.

Encouraging signs

“Looking back, the period around 2014 was not particularly easy, because of the situation in the Ukraine and Crimea,” says Martin Grüll, RBI’s chief financial officer. “We realised that we needed to change some things and we shut a lot of non-core businesses, reduced risk-weighted assets in particular in the US and Asia, and reduced our footprint in Russia. The merger was the final part of the story, which I think has convinced the market that we are out of the woods.”

Following the merger announcement, Standard & Poor’s raised its long-term counterparty credit rating on RBI from BBB to BBB+, but retained a 'negative' outlook because of the bank’s geographical exposures. In June it switched to a 'positive' outlook, citing increasing cohesiveness of the group’s management, a stronger capital buffer and improvement in its funding and liquidity profile.

One driver of improved performance has been the upward trajectory of the local economy. Russia has turned around since the start of the year, posting two consecutive quarters of growth up to the end of March, amid an increase in investment, and the rest of eastern Europe is forging ahead. Romania generated year-on-year growth of 5.6% in the first quarter, trouncing economists’ expectations of a slowdown. The Czech Republic, meanwhile, saw growth of 2.9% year on year, again comfortably ahead of forecasts. Hungary’s statistics office said year-on-year growth was about 4.3% in the first quarter.

European tour

Renewed vitality in some of its key markets was good news for Raiffeisen, and the bank posted a higher-than-expected consolidated profit of €587m in the first half of 2017. As its figures have improved it has also been able to tap rising investor demand for its debt, including in late June selling a deeply subordinated additional Tier 1 (AT1) security, a format that had come under pressure following the wipeout of AT1 investors following the collapse of Spain’s Banco Popular earlier that month.

“We were a bit concerned that the Banco Popular situation might create some headwinds for us, but the positive market feedback convinced us to go ahead,” says Mr Grüll. “The goal was to optimise our capital structure, which means under Basel rules we can have 1.5% of AT1. It makes sense to use the maximum allowable, because the alternative is CET1, which is more expensive.”

Just two weeks after the Spanish episode, RBI announced it planned to sell the debt, mandating its own investment bank, BNP Paribas, Bank of America Merrill Lynch, Citi and UBS to arrange investor meetings.

“Over two days we visited London, Amsterdam, Paris, Frankfurt, Zürich and Vienna and we saw demand was very strong,” says Mr Grüll. “We had an impressive turnaround story and there weren’t any macro events on the horizon that could harm the deal, so we decided to finish the roadshow prematurely and to open the books.” 

A few hours later, bankers had taken €1.7bn of orders, and ended up selling €650m of perpetual non-call 5.5-year bonds with a coupon of 6.125% a year until December 2022. 

The success of the deal has whetted RBI’s appetite for more deeply subordinated transactions, and it may come to market with more AT1 in 2018 and 2019. However, with its capital ratios in such good shape, it is in no rush. “We could do some remaining volume but we have time and right now we are happy with the capital we have,” says Mr Grüll.